Stock rally fails to lift pensions

The pensions black hole lurking within the region’s top companies grew by about £200 million last year – despite a rally in global stock markets which saw investments held by the schemes swell by almost 30 per cent.

The pensions black hole lurking within the region’s top companies grew by about £200 million last year – despite a rally in global stock markets which saw investments held by the schemes swell by almost 30 per cent.

The combined deficit for the 11 biggest pension schemes based in the Midlands, including companies like Cadbury, Mitchells & Butlers and Severn Trent, increased from around £5.7 billion to £5.9 billion at the end of 2009.

Those deficits could not be plugged by a growth in the value of assets held by the schemes – which rose by almost 30 per cent to £13.5 billion, according to analysis by Hymans Robertson Midlands Pension Index.

James Mullins, a senior actuary in Hymans Robertson’s Birmingham office, said the increase in shortfalls was due to measures taken to stabilise the UK economy in the wake of the credit crisis and recession.

As a result long-term inflation expectations meant the estimated cost of meeting future pension payments had increased significantly during the last year.

He said: “Whilst many company directors will be relieved to see the stock market bounce back from dire position in March 2009, they are likely to remain disappointed at the failure of the pension scheme funding levels to recover in a similar fashion.

“Policies that appear to have helped the economy, such as quantitative easement and a record low base rate, had the knock-on effect of raising long-term inflation expectations to the detriment of pension scheme funding.”

Mr Mullins said companies needed to develop strategies to address the burgeoning deficits and that he expected many firms to announce further cuts to defined benefit schemes.

“Company trustees need to keep a close eye on things and have a plan in place for how they are going to get rid of these deficits,” he said.

“I would not be surprised to see some of the companies on that list reviewing some of the benefits they provide.”

Mr Mullins gave the example of Birmingham-based Mitchells & Butlers which last year introduced a salary cap of two per cent to its defined benefit pension scheme in a bid to curtail increasing liabilities.

Top of the list for asset values was Kraft-owned chocolate maker Cadbury, whose pension scheme assets were worth £2.4 billion at the end of last year – but its deficit stands at around £481 million.

Mr Mullins said: “There are companies out there in a much worse situation but its new owner will certainly have to work with the trustees on the Cadbury scheme to address the deficit.

“Cadbury is interesting because to date it is one of only two defined benefit schemes that is still open to new joiners in the FTSE 100.”

BDO Stoy Hayward pensions director Andy McGowan said: “It doesn’t surprise me because there are lots of other things that are going against the companies – one of which is people living longer and the cost of administering the schemes has gone up a whole lot.

“The other thing is that the 30 per cent rise is not putting back the amount of money they lost following the collapse of Lehman Brothers. It’s kind of repairing the damage.”

Mr McGowan warned rising pension deficits in firms with a final salary scheme could spill over to hamper the growth of those companies in the future.

“All the companies running these schemes are facing the same kind of dilemma.

“They can’t afford to close the schemes completely because it’s too expensive so they are having to manage them very carefully.”